Rio Tinto’s ongoing Oyu Tolgoi woes bring politics back into project

8 September 2020 (Last Updated September 8th, 2020 10:40)

Oyu Tolgoi, in the South Gobi region of Mongolia, has been touted by operator Rio Tinto as one of the world’s largest copper-gold deposits. But the mine’s underground extension project has had its share of problems recently, with the Covid-19 pandemic exacerbating development struggles and Rio Tinto confirming delays and a cost blow-out of up to $1.9bn earlier this year. Matthew Hall looks at the challenges facing the project amid government tensions.

Rio Tinto’s ongoing Oyu Tolgoi woes bring politics back into project
The Oyu Tolgoi mine in Mongolia. Image Credit: Rio Tinto.

Rio Tinto operates Oyu Tolgoi via its 50.8% ownership of Turquoise Hill Resources, which in turn owns 66% of Oyu Tolgoi, with the remaining 34% stake owned by the government of Mongolia. According to Rio Tinto, most of the value of Oyu Tolgoi is in underground deposits, and in 2015 Rio Tinto, Turquoise Hill, and the Mongolian government signed the Oyu Tolgoi Underground Mine Development and Financing Plan, setting out an agreed basis for the funding of Oyu Tolgoi’s underground expansion. In 2016, Mining.com reported that Rio Tinto and Turquoise Hill had signed off on a $5.3bn development cost for the project, with first production from the underground expansion expected by 2020.

Well into 2020 production from the underground expansion is still a way off. In July, Rio Tinto confirmed a cost blow-out of up to $1.9bn and delays of up to 30 months, putting first production from the underground project between May 2022 and June 2023. The company pinned the delay on the project’s challenging geology, Reuters reported, while the size of the cost blow-out caught analysts, who had anticipated a smaller cost increase after Rio Tinto had previously flagged issues with the design of the project, off guard.

Rio Tinto could face SEC trouble

Compounding the issue is news this week that the US Securities and Exchange Commission (SEC) is examining claims from a whistleblower that Rio Tinto was aware of problems at the extension project several months before the company confirmed the project would face delays and a cost blow-out. The Financial Times reported that the SEC is probing allegations made by Richard Bowley, a British national who worked as Rio Tinto’s head of strategic projects in Mongolia between 2017 and 2019.

According to the Financial Times, Bowley – who is currently suing Rio Tinto for unfair dismissal – said that he had first alerted company executives to issues at Oyu Tolgoi in February 2018. Bowley continued to raise the issues at the project until January 2019, and in March 2019 his contract was terminated with immediate effect.

Four months later, the announcement came that Oyu Tolgoi’s extension had been delayed and its costs increased considerably.

The SEC has previously charged Rio Tinto with fraud in 2017 for inflating the value of coal assets in Mozambique – an allegation the company denies. Mining Technology has reached out to the SEC to confirm whether Bowley’s allegations are being examined and whether Rio Tinto could be formally investigated for the matter.

Rio Tinto did not respond to Mining Technology’s enquiries by the time of publication, but told the Financial Times that it was “not aware of any investigation” by the SEC relating to Oyu Tolgoi, that it had “consistently complied with its disclosure obligations” concerning the underground development project, and that any claim to the contrary is “completely unfounded”.

Government tensions with Rio Tinto – and the former Prime Minister speaks out

Last week, former Prime Minister of Mongolia Chimediin Saikhanbileg – under whose premiership the Oyu Tolgoi expansion negotiations were settled, and who oversaw a considerable campaign to attract foreign investment to Mongolia – weighed in on the ongoing tensions between Rio Tinto and the current Mongolian government.

When inaugurating the Oyu Tolgoi expansion back during his time in office, Saikhanbileg said: “From now on, the [Oyu Tolgoi] project transforms from a controversial political matter into a business project.” Strangely, that hasn’t quelled the political tensions around the project, with the current President of Mongolia, Khaltmaa Battulga, previously expressing a desire to reduce foreign control over the country’s natural resources and transfer the rights of some Mongolian mines to state-owned enterprises.

Tensions between Rio Tinto and the Mongolian Government have escalated, with the Oyu Tolgoi project a hot topic for public debate and political disputes in the country. According to the Australian Financial Review, Mongolia will not receive its share of dividends from Oyu Tolgoi until its debts to Rio Tinto are repaid, meaning it could take a decade or longer for the country’s 34% stake to pay off. The aforementioned delays and cost increases at the project have only heightened Mongolian frustrations, with concerns on some sides that the country is not getting a fair share of its own resources.

Saikhanbileg criticised Rio Tinto as “arrogant” when calling for the miner and the government to resume talks to ease off the tensions, and he told the Australian Financial Review that the mine’s “complex ownership structure” ought to be simplified, and that “the ideal structure from our side is that we should sell the current 34 per cent stake to Rio Tinto or another third party and renegotiate the tax arrangement so the government can begin to collect taxes and other benefits from the project.”

At the start of 2020, Rio Tinto announced that Oyu Tolgoi had initiated a formal international arbitration process to seek a definitive resolution to its dispute with the Mongolian Tax Authority (MTA) over the MTA claiming Oyu Tolgoi owes an additional $155m in taxes.

As Rio Tinto’s Oyu Tolgoi woes continue, it is clear that Saikhanbileg’s wish to move the development from controversial politics to simple business hasn’t quite panned out.